Callaway Golf Company — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013. The unaudited filing covers Callaway’s golf clubs and golf balls businesses; results reflect golf seasonality and the impact of product launches and foreign exchange.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $178.2 million | $147.9 million | $715.6 million | $714.1 million |
| Gross margin | 33.3% | 2.6% | 39.9% | 33.4% |
| Operating income (loss) | $(17.0) million | $(82.7) million | $34.6 million | $(45.3) million |
| Net income (loss) | $(21.2) million | $(86.8) million | $30.6 million | $(52.2) million |
| Diluted EPS | $(0.32) | $(1.33) | $0.36 | $(0.91) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $7.6 million | $(29.3) million |
At September 30, cash was $37.4 million, down from $52.0 million at year-end 2012. Current assets were $410.1 million and current liabilities $163.0 million. Net accounts receivable was $157.4 million and inventory $190.9 million. The company reported $107.7 million of convertible notes, net of discount; no ABL borrowings were outstanding. ABL availability was $47.6 million, with $1.3 million of letters of credit. The notes have $112.5 million principal, bear 3.75% interest and mature in August 2019.
Changes versus prior year
- Q3 sales rose about 21%; nine-month sales were nearly flat. Management attributed growth primarily to X Hot products and Q3 launches of FT Optiforce drivers and Mack Daddy 2 wedges.
- On a constant-currency basis, and excluding sold or transitioned businesses, current-business sales grew 38% in Q3 and 13% in the first nine months. Unfavorable currency translation reduced reported sales by $13.7 million and $31.5 million, respectively; the sale or transition of certain brands and businesses reduced comparisons by $8.7 million and $53.4 million.
- Nine-month gross margin improved 650 basis points, and operating expenses declined $33.2 million, reflecting lower restructuring charges, improved product mix, less promotional activity and manufacturing efficiencies.
- Golf-club sales increased 26% in Q3 and 1% year to date; golf-ball sales declined 4% and 6%, respectively. Accessories and other sales were lower, including from the apparel and footwear transition and GPS business wind-down.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management said the turnaround was on track and believed cash, operating cash generation and the ABL facility would fund requirements for at least 12 months. It expected approximately $15 million in 2013 capital expenditures.
- The 2012 cost-reduction program had incurred $64.4 million of cumulative charges through September 30; total charges were estimated at approximately $68 million, with approximately $3 million of future charges expected over the next three months. Estimated total savings were approximately $60 million.
- Liquidity and results remain exposed to consumer demand, promotional activity, weather and golf seasonality, foreign exchange, execution of the turnaround, supply and manufacturing issues, and credit-facility availability. The company said it was in compliance with ABL covenants; its fixed-charge coverage covenant was not triggered, although it would not have met that ratio if tested at quarter-end.
- A Cleveland Golf lawsuit filed October 18, 2013 alleges trademark infringement concerning the phrase “Designed by Roger Cleveland” on Mack Daddy 2 wedges. Plaintiffs seek unspecified damages and injunctive relief; management said it could not estimate the outcome or potential loss.
- Other notable items include a $7.2 million investment in TopGolf during the first nine months, bringing the investment to $31.2 million, and termination of the Suntech manufacturing agreement, with $3.7 million of year-to-date charges. The preferred-stock exchange in August reduced preferred shares outstanding and issued approximately 3.4 million common shares.
Investor verification priorities
- Confirm whether sales growth and margin gains persist after adjusting for currency, divested or transitioned businesses, restructuring charges and product-launch timing.
- Monitor operating cash flow, seasonal receivables and inventory, cash balances, and borrowing-base availability under the ABL facility.
- Assess whether the turnaround achieves the stated $60 million savings estimate and whether further restructuring charges arise.
- Review dilution and potential conversion of the convertible notes and remaining preferred stock; the preferred stock’s stated liquidation preference was $18.4 million at quarter-end.
- Track resolution of the Cleveland Golf litigation, uncertain tax positions, and the company’s foreign-exchange exposure; derivative contracts had a net liability fair value of $2.8 million at quarter-end.